US Expat Tax Guide to Tax Season
After you leave the United States, whether you have US citizenship or you are a Green Card holder, you will need to keep filing US tax returns each year. Below is a guide to completing your expat tax return as an American citizen abroad.
1 - Do you need to file?
For the 2021 tax season (January 1, 2020 to December 31, 2020) you will need to file if your worldwide income is at least the amount shown below. If you have self-employed income (freelance income), the filing threshold is much lower, $400 in profits.
Single under age 65 $12,400
Single age 65 or older $14,050
Married filing jointly, both spouses under 65 $24,800
Married filing jointly, one spouse age 65 or older $26,100
Married filing jointly, both spouses 65 or older $27,400
Married filing separately, any age $5
Head of household under age 65 $18,650
Head of household age 65 or older $20,300
Qualifying widow(er) under age 65 $24,800
Qualifying widow(er) age 65 or older $26,100
2 - Worldwide income
You will need to report worldwide income on your US tax return (form 1040). This includes income even if it has been taxed in your home country.
A common misconception is that if your income is under the foreign earned income exclusion then you don't need to file. That is not true - you can use the foreign exclusion to stop the US tax, but you still need to file the return to claim the exclusion.
Also, be careful with income that is tax free in your home country - it may be that the US does not recognize the tax free status and you will still need to declare that on the US tax return.
3 - Foreign Tax Credit
If you had income from outside the US and paid tax on that same income, when you complete your US tax return, you can claim a foreign tax credit against any US tax on that foreign income.
The foreign income and tax paid are disclosed on form 1116 - you can then use that form to credit foreign taxes up to the US tax on the same income.
If the foreign tax is more than the US tax, the credit will be restricted - the US will not give you a refund of foreign tax.
If the foreign tax is less than the US tax, you will pay the additional tax, a top up
You need to be a little bit careful with state tax returns - each state has different rules for foreign tax credits. If you are filing a state tax return and you need to report foreign income on that return, you will just need to check the state rules for claiming foreign tax credits.
4 - Foreign Earned Income Exclusion
If you have foreign earned income and your tax home is outside the US, you may be able to claim the foreign earned income exclusion (FEIE).
Foreign earned income includes - salary, wages, bonus, self employed income, commissions
It does not include - dividends, interest, capital gains, gambling winnings, alimony and pensions (normally rental income unless you can show you provide services as part of renting out your property - even then, only a portion can be used for the exclusion)
For the 2021 tax season, the foreign earned income exclusion is a maximum of $107,600. If you have any excess left over, it does not carry forward to the next year.
Note - if you claim the foreign earned income exclusion, you can't claim the additional child tax credit mentioned below.
5 - Foreign Housing Exclusion and Deduction
You can claim the foreign housing exclusion or foreign housing deduction in addition to the foreign earned income exclusion.
Foreign housing exclusion - you can claim this with employed income
Foreign housing deduction - you can claim this with self-employed income
Note - if you claim the foreign housing exclusion or deduction, you can't claim the additional child tax credit mentioned below.
6 - Catching Up With US Returns
As an American citizen paying taxes abroad, you may be behind in filing US tax returns - or you may have just found out that you still need to file a tax return while you are outside the US.
If you do need to file, the IRS has an amnesty, the streamlined filing compliance procedures. If you are living outside the US, the streamlined program you will use is the streamlined foreign offshore procedures.
The streamlined filing process has 3 parts: (1) the last 3 overdue tax returns, (2) a disclosure document (form 14653) to explain why you have not been filing - not knowing you needed to file is a valid excuse (the IRS call this non-willful conduct), (3) 6 years of FBARs
7 - State Tax Returns
Once you are overseas, the main reason you will still file state returns is for income that comes from that state - the main example would be a rental property.
There are some states, California for example, that do keep a close hold on you and may require you to keep filing state returns for a number of years after you leave.
8 - Filing Deadlines
When you are living in the US, the filing deadline is May 17, 2021.
As an expat overseas, your filing due date is June 15, 2021 - if you do owe any tax, we suggest paying this by April 15, 2021 to stop any interest being charged.
If you have a refund of US tax, you can have a bank transfer, but the IRS will need a US bank account in your name. Otherwise, the IRS will send out a paper check to your current home address (worldwide).
9 - Foreign Bank Account Report
In addition to the US tax return (form 1040), as a US citizen you also need to make a separate report each year for all your foreign financial accounts.
The foreign bank and financial form (FBAR, also called FinCEN 114) has 3 parts: (1) accounts in your name, (2) joint accounts, (3) accounts where you are a signatory - e.g. business accounts, your children's accounts, accounts where you have power of attorney
Bank and financial accounts include current accounts, savings accounts, investments, bonds and pensions.
The FBAR is filed online using the BSA E Filing system and there is a response within 5 minutes of the FBAR being filed to confirm it has been accepted.
The threshold to file the FBAR is $10,000 - you find the highest balance on each financial account at any time during the tax year, add up all the highest balances for your accounts and if they are $10,000 or more then you need to file for all your accounts (the $10,000 threshold is for all your accounts in total, not per account).
10 - Claiming Children - Additional Child Tax Credit
If you claim your child as a dependent on your tax return, you may be able to claim a tax credit or a tax refund.
Conditions to claim the credit:
Your child is 16 or younger on 31 December 2019
They are a US citizen or resident alien and they have a social security number
They lived with you for at least half the tax year
Your earned income needs to be a minimum of $2,500 and a maximum gross income of $200,000 (at which point it starts to decrease )
The tax credit is a maximum of $2,000 per child - if you have no tax, the tax refund is a maximum of $1,400 per child, per year.
11 - FATCA reporting - Form 8938
While you file an FBAR, there is a similar form in the tax return itself. Form 8938 covers the value of your financial assets - the threshold to file is higher than the FBAR, and there are a few more details to disclose.
12 - Ownership of a foreign company - Form 5471
If you own 10% or more of the shares of a company outside of the US, you will need to report that company back to the IRS each year as part of your tax return.
Form 5471 covers Americans who meet the 10% share ownership and also US citizens who are directors or officers of a company outside the US.
When filing form 5471, there are various categories which dictate how much information needs to be submitted - this can be a complicated form and you may need assistance to complete the disclosure.
13 - PFIC Reporting
If you invest in a product (e.g. a fund) based outside of the US that produces mainly passive income (interest, dividends, capital gains etc) then you may need to file form 8621 to report that investment (commonly called PFIC reporting).
In the UK, the most common investments that require PFIC reporting are ISAs and fund investments. There are other types of investments and we recommend a thorough review to check if you do need to report.
Like form 5471, this is a complex form and you may need assistance to complete the disclosure.
14 - Gifts
As a US citizen, if you received gifts during the calendar year you may need to report those as part of your tax return.
Form 3520 covers gifts received from sources outside the US, the thresholds to file the form are:
Gifts from foreign individuals or estate - $100,000
Gifts from a foreign company or partnership - $16,388
Form 3520 is filed as part of your main tax return (form 1040)
If you gave gifts, as a US citizen you may need to file form 709. The conditions to file a gift tax return are:
You made gifts of more than $15,000 to someone (apart from your spouse)
If your spouse is not a US citizen, the threshold is $155,000
Form 709 is filed separately from your main tax return, the due date is May 17, 2021
15 - Pensions
Pensions will be included on your US tax return as worldwide income. If your current country has a tax treaty with the US, you may be able to use that to stop any US tax on pensions.
If you do use the tax treaty, you will need to file form 8833 to explain what part of the treaty you are using and how that impacts your US taxes as an expat.
Even while you are abroad, if you withdraw funds from your US pension early, there could still be an early withdrawal tax penalty of 10%.
16 - Net Investment Income Tax
Although claiming the foreign earned income exclusion and foreign tax credits may stop all federal income tax, it is possible there will be an additional tax to pay.
Net investment income tax (NIIT) was introduced as a way to pay for healthcare in the US. The NIIT law came in after most tax treaties were signed and so you can not offset foreign tax credits against the NIIT.
Net investment income tax is just applied to investment income - interest, dividends, capital gains, rental and royalty income.
If your total income is above the thresholds below, your investment income is deemed to be taxed last and so any amount above the threshold has 3.8% net investment income tax
Single - $200,000
Married filing jointly - $250,000
Married filing separately - $125,000
Head of household - $200,000
Qualifying widow(er) with dependent child - £250,000
17 - Sale of Primary Residence
As a last point, if you do own a home outside of the US, you should always keep an eye on how much gain/profit you have in the property.
Many countries exempt your main home from tax completely when you sell the property. As a US citizen, you need to report the sale of your main home as part of your US tax return.
The US will only provide a tax exemption of a maximum $250,000 for any gain you make on the property. Any gain above that will be taxed in the US - the rate depends on your total income for the year, the highest tax rate on the gain would be 20%.
Summary
Hopefully this guide will help as you make a start on your US tax return. The IRS also has a comprehensive guide for US citizens abroad - publication 54.
We are very happy to help with any questions and we can run through how to file your US expat tax return. Our friendly team of IRS Enrolled Agents have specialized expat tax preparation experience to help expats around the world and walk you through what the next steps are – contact us today.